SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K 405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 -- Fee Required
For the fiscal year ended August 31, 1996 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 -- No Fee Required
For the transition period from _______ to _______
Commission File No. 1-8252
FREDERICK'S OF HOLLYWOOD, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2666265
(State of Incorporation) (IRS Employer Identification Number)
6608 Hollywood Boulevard, Los Angeles, California 90028
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (213) 466-5151
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
Class A Capital Stock $1 Par Value New York Stock Exchange
Class B Capital Stock $1 Par Value
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _______
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
The aggregate market value of capital stock held by nonaffiliates of the
registrant as of October 16, 1996 was approximately $8,165,000 for Class A
Capital Stock and $11,289,000 for Class B Capital Stock.
Number of shares of capital stock outstanding on October 18, 1996 was
2,955,309 - Class A capital Stock and 5,903,118 - Class B Capital Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant proxy statement and notice of annual meeting for the
meeting of January 30, 1997 is incorporated by reference in Part III.
TABLE OF CONTENTS
Page
PART I
Item 1. Business..................................... 1
Item 2. Properties................................... 3
Item 3. Legal Proceedings............................ 4
Item 4. Submission of Matters to a Vote of Security
Holders................................... 4
Executive Officers of the Registrant... 5
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters............... 6
Item 6. Selected Financial Data...................... 6
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 8. Financial Statements and Supplementary Data.. 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures...... 25
PART III
Item 10. Directors and Executive Officers of the
Registrant................................ 26
Item 11. Executive Compensation....................... 26
Item 12. Security Ownership of Certain Beneficial
Owners and Management..................... 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................... 27
PART I
Item 1. BUSINESS
(a) General Development of Business
Frederick's of Hollywood, Inc., incorporated in 1962, as a successor to a
business established in 1946, is a retailer of women's apparel merchandise
through mail order catalogs and boutique specialty stores. Frederick's of
Hollywood, Inc., is a Delaware corporation with executive offices at 6608
Hollywood Boulevard, Los Angeles, California 90028, and its telephone
number is (213) 466-5151. Frederick's of Hollywood, Inc. and its
consolidated subsidiaries are hereby called "Registrant" or "Company".
On June 14, 1996, the Company, along with the founding family shareholders'
trusts, retained the investment banking firm Janney Montgomery Scott Inc.
as financial advisor in an exclusive agreement for the purpose of
presenting to our Board of Directors and the trusts, a program to enhance
the value of the Company's shares.
The program could include the sale of Frederick's shares owned by the
trusts, which aggregates approximately 50.2 percent of the total shares
outstanding, or possibly the sale of all shares or assets, merger or other
consolidation, share repurchase or by recapitalization, joint venture, or
otherwise.
(b) Financial Information about Industry Segments
Information about industry segments is set forth on page 24 and under the
captions "Results of Operations" and "Financial Condition" starting on page
7.
(c) Narrative Description of Business
The information set forth under the captions "Results of Operations" and
"Financial Condition" starting on page 6 provides additional information on
the Company.
It is Registrant's policy to make frequent review of its selling price
structure in order to determine the advisability or necessity of marking
down the selling price of its merchandise.
Registrant purchases its merchandise from a variety of manufacturers. It
is not dependent on any one manufacturer. Registrant retains the services
of buying representatives in New York City to assist in fashion market
coverage.
Buying and distributing personnel are jointly responsible for inventory
replenishment in the stores, principally by causing inventory to be shipped
from Registrant's distribution center or by ordering drop-shipments of
certain items direct to stores by manufacturers.
Employees
Registrant employs regularly on a full or part-time basis approximately
1,600 people. Due to the seasonal nature of the retail business, the
number of employees increases during the Christmas season to approximately
2,000. Registrant does not have any collective bargaining agreements and
Registrant considers its relations with its employees to be good.
Capital Expenditures
During Fiscal 1996, Registrant opened three new stores, remodeled seven,
and closed one, resulting in a net increase of 11,000 square feet. During
the year, more than $4,073,000 was invested in new stores, remodels,
fixtures and equipment. The capital budget will be approximately
$10,000,000 for fiscal 1997. The Company anticipates it will have
sufficient funds generated internally from operations to support its
operating and capital requirements. If internally generated funds are not
sufficient, capital expenditures will be limited to the extent that funds
are internally available.
Mail Order Catalog Operations
Registrant's mail order subsidiary engages in extensive operations in all
50 states. Sales are generated through catalogs published eleven times a
year. Four of these issues are reprinted in a revised form for which a
second mailing is made. The catalogs are distributed primarily to
customers on a mailing list which has been developed over a number of
years. The list has been developed through extensive list rental,
advertising in magazines and newspapers and undergoes continuous review and
updating. Approximately 52,000,000 catalogs are distributed annually.
Advertising, catalog costs and mailing expenses, approximated $21,393,000
in Fiscal 1996.
The subsidiary's mailing list of approximately 1.5 million names is one of
its more valued possessions. The company rents its list to other direct
marketing firms in order to maximize mail order sales and list rental
revenue.
The subsidiary offers a money-back guarantee on all customer purchases.
Slow-moving and obsolete merchandise is offered at reduced prices through
the media of sale catalogs and package inserts.
Retail Store Operations
The Registrant operated 206 women's apparel stores in 39 states during
Fiscal 1996 as compared with 204 stores in the prior fiscal year.
Substantially all stores are located in shopping malls with store size
ranging from 900 to 5,400 square feet and totaling 277,000 square feet.
During the past five years, 42 new stores have been opened and 29 stores
have been closed.
Each of Registrant's retail stores employs a manager responsible for sales,
displaying merchandise, selecting and supervising personnel. Each manager
reports to a District Manager who reports to a Regional Vice President.
Inventory markup, pricing and distribution is determined by the respective
merchandising staffs of Registrant.
The retail stores offer a guarantee of customer satisfaction. Policy
regarding price adjustments to slow-selling and damaged or shopworn
inventory is to reduce the selling price to whatever level necessary to
effect a sale of this merchandise.
Trademarks
Registrant has registered its name as a trademark and markets its products
under such name. The trademarks are renewed every 20 years.
Competition
Registrant is in active competition with department stores and specialty
stores selling similar products. The department stores are generally
larger, well-established companies with greater financial resources. It is
not practical to estimate the number of all competitors because of the
markets served. Registrant competes on the basis of price, quality, and
customer service.
Item 2. PROPERTIES
Registrant owns its principal office and retail store distribution center
located at 6608 Hollywood Boulevard, Los Angeles, California 90028. The
63,500 square-foot building includes 5,400 square feet used as a retail
store.
With the exception of the retail store located at its principal place of
business, Registrant conducts all its retail operations in rented or leased
facilities. The majority of the leases are for terms of ten years.
Substantially all of the leases provided for fixed minimum annual rentals
and a percentage rental based on sales. In addition, Registrant, in most
cases, must pay any increase in real estate taxes over the base year of the
lease as additional rental.
In addition to the retail stores mentioned above, Registrant leases two
other facilities:
1. A 72,000 square foot concrete tilt-up building that is used as a mail
order warehouse, operations, order processing and fulfillment center.
2. A 14,200 square foot office space that is used for accounting, data
processing and administrative functions.
Item 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which Registrant is a party or of
which any of its property is subject, other than ordinary routine
litigation incidental to its business which are not deemed material.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders during the fourth quarter
ended August 31, 1996.
EXECUTIVE OFFICERS OF REGISTRANT
Executive officers of the Company are elected annually by the Board of
Directors and serve at the pleasure of the Board. Certain information
concerning such executive officers is set forth below:
George W. Townson 55 Chairman, President, and
Chief Executive Officer since 1985.
John B. Hatfield 53 Executive Vice President, Chief Financial
and Administrative Officer, Secretary and
Treasurer since 1990.
Nitin G. Parikh 46 Vice President, Control and Planning
since 1989.
Robert R. Genest 58 President - Retail Division since 1994;
Executive Vice President, General Manager -
Retail Division 1990-1994.
Geric B. Johnson 45 Executive Vice President - Mail Order
Division since 1994; Vice President - Mail
Order Operations 1989-1994.
All of the above officers have been actively engaged in Registrant's
business for the past five years.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
(a) MARKET PRICE RANGES
The capital stock of Frederick's of Hollywood, Inc. is traded on the New
York Stock Exchange. Ticker symbol: FOH.A and FOH.B. The following table
sets forth the closing high and low market prices per share of the
Company's capital stock:
Class A Class B
Capital Stock Capital Stock
High Low High Low
Fiscal 1996
First quarter $5 5/8 $4 3/8 $5 1/2 $4 1/4
Second quarter 4 7/8 3 7/8 4 3/4 3 1/2
Third quarter 4 3/4 3 3/4 4 3/4 3 1/4
Fourth quarter 5 3/4 3 7/8 5 1/4 3 5/8
Fiscal 1995
First quarter $4 7/8 $3 3/4 $4 3/4 $3 1/4
Second quarter 6 1/8 3 5/8 5 5/8 3 1/2
Third quarter 5 1/2 4 3/8 5 1/2 3 7/8
Fourth quarter 6 1/4 5 1/8 6 1/2 4 1/2
(b) As of October 3, 1996, Registrant had 580 Class A and 504 Class B
stockholders of record.
(c) The Company paid quarterly cash dividends on both Class A and Class B
shares of 2.5 cents per share in Fiscal 1996 and a semi-annual
dividend of 2.5 cents per share in Fiscal 1995.
Item 6. SELECTED FINANCIAL DATA
The following table summarizes data from the Company's annual financial
statement for the years 1992 through 1996 and the notes thereto. The
Company's fiscal year ends on the Saturday closest to August 31. Fiscal
year 1994 consisted of 53 weeks, all other years presented consist of 52
weeks. The Company's complete annual financial statement and notes thereto
for fiscal 1996 are on pages 13 through 25 of this Form 10-K 405.
<TABLE>
FIVE YEAR FINANCIAL SUMMARY
(In thousands except percentages
and per share data) 1996 1995 1994 1993 1992
Operating results:
<S> <C> <C> <C> <C> <C>
Net sales $148,090 $142,931 $132,153 $128,516 $117,030
Gross profit 60,031 58,728 54,744 55,622 52,862
Earnings (loss) before
income taxes (664) 4,412 (1,705) 7,655 8,018
Net earnings (loss) (438) 2,652 (903) 4,737 5,073
Primary earnings (loss) per share
Classes A & B (.05) .31 (.10) .53 .57
Cash dividends per share -
Classes A & B .10 .075 .05 .05 .05
Primary weighted average shares
outstanding - Classes A & B 8,745 8,693 8,876 8,915 8,698
Financial position at year end:
Working capital 20,447 21,263 17,486 15,783 11,213
Total assets 52,709 55,952 55,417 50,838 45,790
Long-term debt 240 480 720 -- --
Capital lease obligations 672 884 701 1,207 1,663
Stockholders' equity 35,525 36,599 34,413 36,615 32,204
Equity per share -
Classes A & B 4.06 4.21 3.88 4.11 3.67
Financial ratios:
Net earnings (loss) to sales (0.3% 1.9% (0.7)% 3.7% 4.3%
Net earnings (loss) to average
stockholders' equity (1.2)% 7.4% (2.5)% 13.8% 17.2%
Current ratio 2.6 2.5 2.1 2.4 2.1
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis should be read in conjunction with the
Company's financial statements and the notes related thereto.
Results of Operations
Sales - Consolidated sales increased in 1996 to $148,090,000 from
$142,931,000 in 1995 and $132,153,000 in 1994. The percentage of sales
increases were 3.6% and 8.2% in 1996 and 1995 respectively. The factors
contributing to the increase in each segment were as follows:
Retail Store sales volume increased $1,663,000 or 2.2% in 1996 when
compared to 1995 and increased $3,731,000 or 5.1% in 1995 when
compared to 1994. The increased sales volume for 1996 is attributable
to increased promotional activity, which includes increased markdowns
(13.7% of sales compared with 13.4% last year) and $643,000 in
additional promotional/advertising expenses. Despite achieving higher
sales for the year, the rate of sales growth was not sufficient to
offset the increased costs. The increase in retail store sales volume
in 1995 was due to the positive response to our value pricing program
which was implemented late in 1994. Comparable store sales volume for
1996 increased 1.3% and increased 6.5% in 1995.
In Fiscal 1996, three stores were opened and one was closed while, in
1995, seven stores were opened and eleven were closed. At the end of
1996 the Company operated 206 stores in 39 states.
The Company conducts market tests and or market research on a
continuous basis in an effort to improve profitability. The effect on
net income associated with the tests and or research presently being
performed is not material. The effect of the successful execution of
current surveys' recommendations, test results or our current
implementation of new merchandise and marketing strategies on future
financial condition and results of operations is not presently
determinable.
Mail Order sales increased $3,496,000 or 5.2% in 1996 when compared to
1995 and $7,047,000 or 11.8% in 1995 when compared to 1994. The
increase in sales volume for 1996 when compared to 1995 is
attributable to an increase in the number of catalogs distributed.
The increase in sales volume for 1995 when compared to 1994 is
attributable to an increase in volume due to the number of catalogs
distributed as well as an increase in catalog productivity.
Cost of goods sold (including buying and occupancy cost) - Cost of goods
sold increased $3,856,000 or 4.6% in 1996 compared to 1995 and $6,794,000
or 8.8% in 1995 compared to 1994. As a percentage of sales, cost of goods
sold were 59.5% in 1996, 58.9% in 1995, and 58.6% in 1994. The increase in
the cost of goods, buying and occupancy cost percentage for 1996 is mainly
attributable to increased markdowns (mentioned above), inventory shrinkage
and rent. The increase in cost of goods sold for 1995 in dollars as well
as a percentage of sales is attributable to reduced markup to accommodate
our value pricing program and increased markdowns in both retail and mail
order.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses increased $5,914,000 from 1995 to 1996 and
increased $2,427,000 from 1994 to 1995. As a percentage of sales, these
expenses were 41.1% in 1996, 38.5% in 1995, and 39.7% in 1994. Expenses
for 1996 reflect higher payroll, catalog production, postage and our
catalog toll-free line (due to the implementation of telephone operators
having access to inventory availability while speaking with customers).
Expenses for 1995 reflect slightly higher payroll dollars while the
percentage to sales decreased 0.8% and an increase in advertising dollars
as well as percentage increase of 0.3%.
Provision for Store Closings - In the fourth quarter of fiscal 1994, the
Company recorded a provision for closing twelve stores and the write down
of certain display fixtures of $3,442,000.
In the fourth quarter of fiscal 1995, the Company recorded a $790,000 pre-
tax credit to the provision for store closing due to favorable lease
settlements from landlords on some closed stores and the inability of the
Company to close two stores out of the original 12 stores identified for
closure because of changing business and economic conditions that made
closing these two stores unfeasible.
See Note 3 of Notes to Consolidated Financial Statements for additional
disclosure related to the provision for store closure.
The Company does not expect a material impact on liquidity or operating
results from its inability to close two of the stores as originally
planned.
Other Income (Expense) - Interest expense represents the payment of
interest on ESOP debt and capitalized leases. The decrease in
miscellaneous other expense of $296,000 for 1995 when compared to 1994
represents, primarily, an increase in interest income. The increase in
miscellaneous other income for 1996 of $314,000 represents a reduction in
the loss on the sale of fixed assets.
Income Taxes - The effective tax rate for 1996 was (34.0%) compared with
39.9% in the prior year.
Change in Accounting Principle - Effective August 29, 1993, the Company
changed its method of accounting for income taxes by adopting the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"). Statement 109 requires a
change from the deferred method of accounting for income taxes under APB
Opinion No. 11 to the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the expected future tax consequences
attributable to differences between the financial statement and tax basis
of assets and liabilities using enacted tax rates expected to apply in the
years in which the temporary differences are expected to reverse. As
permitted by Statement 109, the Company has elected not to restate the
financial statements of prior years.
The adoption of Statement 109 resulted in the recognition of $120,000 of
deferred federal tax benefits in fiscal 1993.
Financial Condition
Liquidity and Capital Resources - Cash and cash equivalents were
$8,379,000, $11,441,000, and $10,556,000 for 1996, 1995, and 1994,
respectively. Total working capital decreased to $20,447,000 in 1996 from
$21,263,000 in 1995 and $17,486,000 in 1994. The current ratio was 2.6,
2.5, and 2.1 in 1996, 1995, and 1994, respectively.
Inventory decreased $309,000 to $19,553,000 in 1996 from $19,862,000 in
1995. The Company continues to closely monitor its inventories and
believes its inventory position is substantially on plan relative to the
anticipated sales trend.
Prepaid expenses decreased $400,000 in 1996. Total current liabilities,
excluding capital lease obligations and ESOP loan decreased $1,836,000 in
1996. The decrease in prepaid expenses is attributed to the difference in
the timing of invoice payments.
The current income tax receivable of $945,000 for 1996 and $213,000 for
1995 represents the anticipated refund of taxes paid based upon required
estimated tax payments that exceeded the Company's liability.
Deferred catalog cost decreased $384,000. The decrease is attributable to
the timing difference of catalog mailings.
Stockholders' equity was $35,525,000, $36,599,000, and $34,413,000 in 1996,
1995, and 1994, respectively. Equity per share was $4.06, $4.21, and $3.88
in 1996, 1995, and 1994, respectively.
During the year more than $4,073,000 was invested in new stores, remodels,
fixtures, and equipment. Our capital expenditures budget is approximately
$10,000,000 for fiscal 1997 which we anticipate funding through cash
generated internally from operations or from cash on hand.
The Company expects to remodel 22 existing stores and open eight new stores
by the end of fiscal 1997. Management estimates that the Company's cash
requirement will be approximately $325,000 (excluding inventory) for each
store. Accordingly, the Company expects to use approximately $10,000,000
for store openings and remodels during this period. The Company
anticipates it will have sufficient funds generated internally from
operations or cash on hand to support its operating and capital
requirements in fiscal 1997. However, with the number of lease expirations
during fiscal 1998 and 1999 internally generated funds will not be
sufficient to support the Company's operating and capital expenditure
needs.
Shareholder Value Program
On June 14, 1996, the Company, along with the founding family shareholders'
trusts, retained the investment banking firm Janney Montgomery Scott Inc.
as financial advisor in an exclusive agreement for the purpose of
presenting to our Board of Directors and the trusts, a program to enhance
the value of the Company's shares.
The program could include the sale of Frederick's shares owned by the
trusts, which aggregates approximately 50.2% of the total shares
outstanding, or possibly the sale of all shares or assets, merger or other
consolidation, share repurchase or by recapitalization, joint venture, or
otherwise.
Seasonality
The Company's business is seasonal in nature with the Holiday Season and
Valentine's Day (which both fall within the second quarter) historically
accounting for the largest percentage of sales volume. In the Company's
two most recent fiscal years, the second quarter accounted for
approximately 30% of the Company's annual sales.
Impact of Inflation
The primary inflationary factor related to the Company's operations is
reflected in higher store rentals. Furthermore, some of the Company's
present leases provide for the escalation of annual rentals based upon
increases in specific cost of living indices. The Company expects that
most of the leases it enters into in the future will contain similar
provisions.
Statement Regarding Forward Looking Disclosure
The preceding Management's Discussion and Analysis contains various forward
looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended (the Securities Act), and Section 21E of the Exchange
Act, which represent the Company's expectations or beliefs concerning
future events. The Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including, the
sufficiency of the Company's working capital and cash flows from operating
activities. In addition, these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward looking statements, including, without limitation, a
decline in demand for the merchandise offered by the Company, the ability
of the Company to locate and obtain acceptable store sites and lease terms
or renew existing leases, the ability of the Company to gauge the fashion
tastes of its customers and provide merchandise that satisfied customer
demand, management's ability to manage the Company's expansion, the effect
of economic conditions, the effect of severe weather or natural disasters
and the effect of competitive pressures from other retailers.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements: Page
Report of Independent Auditors............................ 12
Consolidated Statements of Operations..................... 13
Consolidated Balance Sheets .............................. 14
Consolidated Statements of Cash Flows..................... 15
Consolidated Statements of Changes in Stockholders' Equity 16
Notes to Consolidated Financial Statements ............... 16
Financial Statement Schedules:
Schedules and notes not included have been omitted because they are
not applicable or the required information is included in the consolidated
financial statement and notes thereto.
Supplementary Data:
Quarterly Financial Summary (unaudited).................. 25
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of Frederick's of Hollywood, Inc.:
We have audited the accompanying consolidated balance sheets of Frederick's
of Hollywood, Inc. and subsidiaries as of August 31, 1996, and September 2,
1995 and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-
year period ended August 31, 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Frederick's of Hollywood, Inc. and subsidiaries as of August 31, 1996, and
September 2, 1995, and the results of their operations and their cash flows
for each of the years in the three-year period ended August 31, 1996 in
conformity with generally accepted accounting principles.
Los Angeles, California
October 25, 1996
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's Omitted, except per share data)
1996 1995 1994
<S> <C> <C> <C>
Net sales $148,090 $142,931 $132,153
Costs and expenses:
Cost of goods sold,
buying and occupancy costs 88,059 84,203 77,409
Selling, general and
administrative expenses 60,871 54,957 52,530
Provision for store closing -- (790) 3,442
148,930 138,370 133,381
Operating profit(loss) (840) 4,561 (1,228)
Other income (expense):
Interest expense (107) (118) (150)
Miscellaneous 283 (31) (327)
176 (149) (477)
Earnings(loss) before income taxes (664) 4,412 (1,705)
Income taxes (benefit) (226) 1,760 (682)
Earnings (loss) before cumulative
effect of a change in
accounting principle (438) 2,652 (1,023)
Cumulative effect of a change
in accounting principle -- -- 120
Net earnings(loss) $ (438) $ 2,652 $ (903)
Earnings(loss) per share
Primary - Classes A & B $ (.05) $ .31 $ (.10)
Fully diluted - Classes A & B $ (.05) $ .30 $ (.10)
Weighted average shares outstanding
Primary - Classes A & B 8 745 8,693 8,876
Fully diluted - Classes A & B 8,745 8,702 8,875
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,379 $11,441
Short term investment 480 --
Accounts receivable 499 658
Income tax receivable 945 213
Merchandise inventories 19,553 19,862
Deferred income taxes 843 765
Prepaid expenses 2,215 2,615
Total current assets 32,914 35,554
PROPERTY AND EQUIPMENT, AT COST:
Land 128 128
Buildings and improvements 881 698
Fixtures and equipment 14,687 13,473
Leasehold improvements 20,130 18,878
Property under capital leases 1,686 1,686
37,512 34,863
Less accumulated depreciation
and amortization (19,479) (16,638)
Net property and equipment 18,033 18,225
Deferred catalog costs 1,723 2,107
Other assets 39 39
TOTAL ASSETS $ 52,709 $ 55,925
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,298 $11,617
Dividends payable 221 221
Current portion of:
Capital lease obligations 212 200
ESOP loan guarantee 240 240
Accrued payroll 430 526
Accrued insurance 828 1,018
Other accrued expenses 238 469
Total current liabilities 12,467 14,291
Capital lease obligations 672 884
ESOP loan guarantee 240 480
Deferred rent 811 669
Deferred income taxes 2,994 3,002
STOCKHOLDERS' EQUITY:
Capital stock of $1 par value
Authorized 15,000,000 Class A shares,
35,000,000 Class B shares; issued
2,955,000 Class A shares, 5,903,000
Class B shares in 1996 and 1995 8,858 8,858
Additional paid-in capital 732 738
Reduction for ESOP loan guarantee (456) (701)
Treasury stock (6) (5)
Retained earnings 26,397 27,709
TOTAL STOCKHOLDERS' EQUITY 35,525 36,599
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,709 $ 55,925
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (000's Omitted)
<S> <C> <C> <C>
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ (438) $2,652 $ (903)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Provision for store closing -- (1,852) 3,290
Depreciation and amortization 4,174 4,105 4,206
ESOP compensation 257 224 --
Loss on sale of fixed assets 84 431 358
Changes in assets and liabilities:
Accounts receivable 159 (130) (54)
Income tax receivable (732) 668 (881)
Merchandise inventories 309 (1,948) (753)
Prepaid expenses 400 (403) (746)
Deferred catalog costs 384 (524) 183
Other assets -- (1) 5
Accounts payable and
accrued expenses (1,836) 677 3,011
Deferred rent 142 158 215
Deferred income taxes (86) 779 (1,062)
Income taxes payable -- -- (258)
Net cash provided by operating activities 2,817 4,836 6,611
Cash flows from investing activities:
Proceeds from sale of fixed assets 7 205 2
Purchase of short term investments (480) -- --
Capital expenditures (4,073) (3,082) (2,348)
Net cash used for investing activities (4,546) (2,877) (2,346)
Cash flows from financing activities:
Payment of capital lease obligations (200) (365) (506)
Payment of dividends (869) (431) (443)
Payment of dividends on unearned
ESOP shares (17) (11) --
Purchase of treasury stock (7) (26) --
Proceeds from exercise of
stock options -- -- 108
Net increase (decrease) in ESOP
loan guarantee (liability) (240) (240) 960
Reduction for ESOP loan
guarantee (equity) -- -- (960)
Stock split -- (1) (4)
Net cash used for financing activities (1,333) (1,074) (845)
Net increase (decrease) in cash
and cash equivalents (3,062) 885 3,420
Cash and cash equivalents at
beginning of year 11,441 10,556 7,136
Cash and cash equivalents at
end of year $ 8,379 $11,441 $10,556
Supplemental disclosure to consolidated
statements of cash flows:
Cash flow information:
Interest paid $ 111 $ 118 $ 150
Income taxes paid 601 802 1,386
Non-cash investing and financing
transactions:
Leases capitalized -- 747 --
Dividends declared 221 221 --
Provision for store closing
Fixed asset disposal -- 756 475
Inventory disposal -- 183 24
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Capital Additional Treasury
Stock Paid-in ESOP Stock Retained
Amount Capital Loan at cost Earnings
<S> <C> <C> <C> <C> <C>
Balance at August 28, 1993 $8,841 $ 698 -- -- $27,076
Stock split (2) (2) -- -- --
Stock options exercised 19 75 -- -- --
ESOP loan guarantee -- -- $(960) -- --
Tax benefit from
exercise of stock options -- 14 -- -- --
Cash dividends
($.05 per share) -- -- -- -- (443)
Net loss -- -- -- -- (903)
Balance at September 3, 1994 8,858 785 (960) -- 25,730
Stock split -- (1) -- -- --
ESOP loan guarantee -- (46) 259 -- --
Purchase of treasury stock -- -- -- $ (5) (21)
Cash dividends
($0.075 per share) -- -- -- -- (652)
Net earnings -- -- -- -- 2,652
Balance at September 2, 1995 8,858 738 (701) (5) 27,709
ESOP loan guarantee -- (6) 245 -- --
Purchase of treasury stock -- -- -- (1) (5)
Cash dividends
($0.10 per share) -- -- -- -- (869)
Net loss -- -- -- -- (438)
Balance at August 31, 1996 $8,858 $ 732 $ (456) $ (6) $26,397
</TABLE>
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note One. The Company and Summary of Significant Accounting Policies
The Company and Basis of Presentation The consolidated financial
statements include the account of Frederick's of Hollywood, Inc. and its
subsidiaries (collectively referred to as the Company). All significant
intercompany balances and transactions have been eliminated in
consolidation. Frederick's of Hollywood, Inc. (a Delaware Corporation),
incorporated in 1962, as a successor to a business established in 1946, is
a retailer of women's apparel merchandise through mail order catalogs and
boutique specialty stores.
On June 14, 1996, the Company, along with the founding family shareholders'
trusts, retained the investment banking firm Janney Montgomery Scott Inc.
as financial advisor in an exclusive agreement for the purpose of
presenting to our Board of Directors and the trusts, a program to enhance
the value of the Company's shares.
The program could include the sale of Frederick's shares owned by the
trusts, which aggregates approximately 50.2% of the total shares
outstanding, or possibly the sale of all shares or assets, merger or other
consolidation, share repurchase or by recapitalization, joint venture, or
otherwise.
Fiscal Year The Company's fiscal year ends on the Saturday closest to
August 31. Fiscal years 1996, 1995, and 1994 ended on August 31, September
2, and September 3 respectively. Fiscal years 1996 and 1995 consisted of
52 weeks, while fiscal year 1994 consisted of 53 weeks.
Cash Equivalents and Short Term Investments The Company considers highly
liquid investments with an initial maturity of three months or less to be
cash equivalents. Cash equivalents and short term investments are carried
at cost, which approximates fair value. Short term investments consist
solely of a certificate of deposit with a maturity at date of purchase of
12 months.
Use of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
Merchandise Inventories Merchandise inventories are valued at the lower of
cost or market on the first-in, first-out basis.
Depreciation and Amortization Properties and equipment are depreciated on
the straight-line method based upon useful lives which range from 10 to 25
years for buildings and improvements and four to ten years for equipment.
Leasehold improvements are amortized over the remaining term of the lease
or their useful lives, whichever is shorter.
Income Taxes Income taxes are accounted for under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Effective August 29, 1993, the Company adopted Statement 109 and has
reported the cumulative effect of that change in the method of accounting
for income taxes in the 1994 consolidated statement of operations.
Pursuant to the deferred method under APB Opinion No. 11, which was applied
in 1993 and prior years, deferred income taxes are recognized for income
and expense items that are reported in different years for financial
reporting purposes and income tax purposes using the tax rate applicable
for the years of the calculation.
Adoption of Accounting Standards In October 1995 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" (FAS 123). The Company has
elected to adopt FAS 123 in fiscal 1997 through disclosure only.
Deferred Catalog Costs The Company expenses the costs of advertising for
magazines, radio, and other media the first time the advertising takes
place, except for direct-response advertising, which is capitalized and
amortized over its expected period of future benefits.
Direct-response advertising consists primarily of catalog production and
mailing costs that have not yet been fully amortized over the expected
revenue stream, and are classified as non-current assets. Prior to
mailing, catalog costs are classified as prepaid expenses.
Catalog costs reported as prepaid expenses were $829,000 and $1,351,000 for
1996 and 1995, respectively. Advertising expense (excluding postage) was
$18,742,000, $15,168,000 and $13,766,000 for 1996, 1995, and 1994,
respectively.
Impairment of Long-Lived Assets In the event that facts and circumstances
indicate that the cost of long-lived assets or other assets may be
impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value
is required.
Reclassifications Certain reclassifications have been made to the prior
years' consolidated financial statements to conform to the 1996
presentation.
Note Two. Earnings (Loss) Per Share
Earnings (loss) per share calculations are based on the weighted
average number of shares of common stock outstanding during each
period plus common stock equivalents. Common stock equivalents
reflect the assumed exercise of dilutive employees' stock options less
the number of treasury shares assumed to be purchased from the
proceeds using average market price or, for fully diluted earnings per
share, the greater of the average market price or period end market
price of the Company's common stock.
The Company has two classes of stock, Class A capital stock and Class
B capital stock. Both classes of stock have substantially identical
rights, including dividend rights, except that the Class A stock will
have one vote per share and Class B stock will be non-voting, unless
such class is entitled to vote as a matter of law.
<TABLE>
(In thousands except per share data) 1996 1995 1994
<S> <C> <C> <C>
Net earnings (loss) $ (438) 2,652 (903)
Earnings (loss) per share
before cumulative effect
of a change in accounting
principle
Primary $ (.05) .31 (.11)
Fully diluted $ (.05) .30 (.11)
Per share cumulative effect
of change in accounting
principle
Primary $ -- -- .01
Fully diluted $ -- -- .01
Earnings (loss) per common
and equivalent share
Primary $ (.05) .31 (.10)
Fully diluted $ (.05) .30 (.10)
Common and common
equivalent shares
(weighted average)
Primary 8,745 8,693 8,876
Fully diluted 8,745 8,702 8,875
</TABLE>
Note Three. Provision for Store Closing
In the fourth quarter of fiscal 1994, the Company recorded a provision for
closing 12 stores and the write down of certain display fixtures of
$3,442,000. The provision reflects anticipated costs associated with lease
buyouts of $1,710,000, the non-recoverable investment in property,
equipment and inventory of $1,644,000, and other expenses directly related
to the store closings of $88,000.
In the fourth quarter of fiscal 1995, the Company recorded a $790,000 pre-
tax credit to the provision for store closing due to favorable lease
settlements from landlords on some closed stores and the inability of the
Company to close two stores out of the original 12 stores identified for
closure because of changing business and economic conditions that made
closing these two stores financially unfeasible.
Charges against the store closing reserve for fiscal years 1996, 1995 and
1994, were $ -0-, $2,791,000 and $651,000, respectively. The summary for
these charges are as follows (000's Omitted):
1996 1995 1994
Lease buyouts $ -- $1,055 $ 150
Fixed assets/inventory -- 939 499
Other expenses -- 7 2
Unutilized portion of provision -- 790 --
Total $ -0- $2,791 $ 651
The consolidated statement of operations includes sales and operating
losses for the ten stores designated in the provision for store closing
that were actually closed. A summary for the fiscal years 1996, 1995, and
1994 is as follows (000's Omitted):
1996 1995 1994
Net sales -0- $732 $1,909
Operating loss -0- 140 440
Note Four. Income Taxes
The provisions for income taxes are as follows (000's Omitted):
1996 1995 1994
Current: Federal $ (167) $ 910 $ 217
State 27 71 43
Deferred: Federal (53) 573 (764)
State (33) 206 (178)
$ (226) $1,760 $(682)
A reconciliation of income tax expense with the expected tax expense
computed by applying the statutory Federal income tax rate to earnings
before income taxes follows (000's Omitted):
<TABLE>
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss)
before taxes $ (664) 100.0% $4,412 100.0% $(1,705) 100.0%
Computed "expected"
tax expense (benefit) $ (226) (34.0%) $1,500 34.0% $ (580) (34.0%)
State taxes, net of
Federal tax benefit
(expense) (6) (0.9%) 183 4.2% (89) (5.2%)
Other items 6 0.9% 77 1.7% (13) (0.8%)
$ (226) (34.0%) $1,760 39.9% $ (682) (40.0%)
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at August
31, 1996, September 2, 1995, September 3, 1994 are presented below:
<TABLE>
<S> <C> <C> <C>
Deferred tax assets: 1996 1995 1994
Provision for store closing $ -- $ -- $ 1,139
Inventories, principally due to
additional cost inventories
for tax purposes pursuant to
the Tax Reform Act of 1986 655 705 577
Accrued expenses 138 60 20
Other 50 -- --
Total deferred tax assets 843 765 1,736
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation (2,994) (3,002) (3,194)
Net deferred tax liability $(2,151) $(2,237) $(1,458)
</TABLE>
The Company has not provided for a valuation allowance against its deferred
tax assets as realization of such assets is considered to be more likely
than not.
Note Five. Employee Stock Option and Benefit Plans
The Company has two stock options plans - The 1984 Plan which expired on
September 26, 1994, and the 1990 Plan("The Plans") which provide for the
granting of incentive stock options to officers and other key employees for
the purchase of up 750,000 shares (250,000 Class A Capital Stock, 500,000
Class B Capital Stock) of the Company's capital stock. The exercisable
features of the stock options are established by the stock option committee
at the time of grant. The options are exercisable at prices not less than
the market value at date of grant, and expire no later than ten years after
date of grant. The Plans also provide for the granting of stock
appreciation rights in conjunction with the options. The rights enable the
holder to receive a payment equal to the excess of the fair market value of
the Company's capital stock over the option price at the date of exercise.
Such right may be exercised only if the holder exercises the accompanying
stock option by purchasing one share of stock for each appreciation right
exercised.
Transactions involving the Plans are summarized as follows (000's Omitted):
1996 1995 1994
Outstanding at
beginning of period 954 1,022 840
Granted -- -- 501
Exercised -- -- (19)
Cancelled (22) (68) (300)
Outstanding at
end of period 932 954 1,022
Price range of options $4.83-9.13 $4.83-9.13 $4.83-9.13
At August 31, 1996, September 2, 1995, and September 3, 1994, 868,000,
769,000, and 341,000 shares, respectively, were exercisable. There were no
stock appreciation rights outstanding during the three-year period ended
August 31, 1996.
The sale of shares acquired from the exercise of incentive stock options
within one year of exercise results in state and federal income tax
benefits to the Company equal to the difference between the market price at
the date of exercise and the option price. During 1996, 1995, and 1994, $-
0-, $-0-, and $14,000, respectively, was credited to additional paid-in
capital for these tax benefits.
During fiscal 1993, the Company established a trust to administer a
leveraged Employee Stock Ownership Plan (ESOP). In January 1994, the ESOP
purchased 357,143 shares of the Company's Class A Capital Stock, financed
by the proceeds from a $1,200,000 note issued by the ESOP and an initial
contribution of $318,968 from the Company. The Company guaranteed the loan
and is obligated to make annual contributions sufficient to enable the ESOP
to repay the loan principal and interest. The loan guarantee is secured by
a certificate of deposit in an amount equal to the outstanding principal
balance. The terms of the ESOP loan guarantee include various covenants,
all of which the Company was in full compliance. Charges to operations for
this plan were $288,000, $303,000, and $288,000 for 1996, 1995, and 1994,
respectively. The shares of stock held by the ESOP have been placed with
the ESOP trustee and are allocated to eligible employees annually. These
shares are allocated in the same proportion that the current year's
principal and interest payments bear to the total principal and interest
paid over the life of the borrowing.
The ESOP shares, as of the end of 1996 and 1995 were as follows:
1996 1995
Allocated shares 185,584 129,700
Shares released for allocation 58,418 61,617
Unreleased shares 107,165 165,583
Shares distributed (2,505) (5,733)
ESOP shares 348,662 351,167
Earnings per share includes 241,497 and 185,584 ESOP shares for 1996 and
1995 respectively.
The ESOP plan provides that, upon a change in control(see Note 1), the
Company will provide for the full payment of any outstanding loan, allocate
all shares and that all participant's accounts shall be fully vested.
The Company has non-qualified executive savings and retirement plans which
provide benefits for certain executives of the Company. The plans allow
for employee and matching employer contributions as well as an additional
employer contribution in an amount necessary to provide for specified
levels of benefits to participants upon retirement. The Company recorded
expense of $177,000, $187,000, and $190,000 in fiscal 1996, 1995, and 1994,
respectively.
Note Six. Leases and Commitments
The Company leases office equipment under capital leases expiring in
various years through 2000. Future minimum lease payments under capital
leases are as follows (000's Omitted):
1997 $ 211
1998 225
1999 238
2000 210
Total minimum lease payments $ 884
Less amount representing interest 102
Present value of minimum lease payments $ 782
There are no executory costs of contingent rental provisions in the capital
leases.
Store, warehouse and office facilities are occupied under operating leases
providing for minimum rental commitments as follows (000's Omitted):
1997 $ 8,834
1998 7,307
1999 6,290
2000 5,309
2001 4,082
2002 and thereafter 8,871
Total minimum payments required $40,693
On substantially all leases, the Company is responsible for incremental
rental increases based on sales, as well as repairs, maintenance and
property taxes. Renewal privileges exist on certain leases. Total rent
expense for 1996, 1995, and 1994 amounted to $12,344,000, $11,878,000, and
$12,015,000, respectively. The Company records rental expense on a
straight line basis, any excess of rental expense over amounts paid is
recorded as deferred rent.
The Company has outstanding letters of credit of $1,875,000 on August 31,
1996 for import merchandise.
The Company is a party to various claims, complaints, and other legal
actions that have arisen in the normal course of business from time to
time. The Company believes that the outcome of all pending legal
proceedings, in the aggregate, will not have a material adverse effect on
the Company's financial position or the results of its operations.
Note Seven. Segment Information
The Company, through its wholly owned subsidiaries, operates a catalog mail
order business and a retail chain of women's specialty boutique stores.
Financial information for each of these two business segments follows
(000's Omitted):
<TABLE>
Retail Catalog Consol.
Stores Mail Order Corporate Total
<S> <C> <C> <C> <C>
1996
Net sales $77,780 $70,310 -- $148,090
Operating profit(loss) (1,762) 922 -- (840)
Depreciation and amortization
of property and equipment 3,758 416 -- 4,174
Capital expenditures 3,832 241 -- 4,073
Identifiable assets 26,430 15,632 $10,647 52,709
1995:
Net sales $76,117 $66,814 -- $142,931
Operating profit 866 3,695 -- 4,561
Depreciation and amortization
of property and equipment 3,691 414 -- 4,105
Capital expenditures 3,281 548 -- 3,829
Identifiable assets 26,124 17,382 $12,419 55,925
1994:
Net sales $72,386 $59,767 -- $132,153
Operating profit (loss) (3,641) 2,413 -- (1,228)
Depreciation and amortization
of property and equipment 3,804 402 -- 4,206
Capital expenditures 2,148 200 -- 2,348
Identifiable assets 27,361 14,989 $13,067 55,417
</TABLE>
In determining operating profit, various expenses are allocated to segments
on the basis of sales, payroll and estimated assets employed. Identifiable
assets are those directly employed by each segment and allocated on the
basis of estimated usage. Corporate assets are principally cash and cash
equivalents.
Note Eight. Quarterly Results (Unaudited)
Quarterly financial data are summarized below (000's Omitted):
<TABLE>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1996:
Net sales $36,642 $44,565 $35,282 $31,601
Gross profit 15,570 18,704 14,237 11,520
Net earnings(loss) 107 1,243 (686) (1,102)
Primary:
Classes A & B .01 .14 (.08) (.13)
Fully diluted:
Classes A & B .01 .14 (.08) (.13)
1995:
Net sales $36,048 $41,427 $33,312 $32,144
Gross profit 15,539 17,853 13,828 11,508
Net earnings(loss) 1,028 2,184 440 (1,000)
Primary:
Classes A & B .12 .25 .05 (.11)
Fully diluted:
Classes A & B .12 .25 .05 (.11)
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There are no disagreements with the Company's independent auditors.
PART III
Information with respect to the following items is incorporated by
reference in Registrant's 1997 Proxy Statement and notice of annual meeting
for the meeting to be held on January 30, 1997 ("Proxy Statement").
However, information regarding executive officers is contained in Part I of
this report pursuant to General Instruction G of this form.
Item 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the caption in Registrant's Proxy Statement --
"Election of Directors" and is hereby incorporated by reference.
Item 11. EXECUTIVE COMPENSATION
Reference is made to the caption in Registrant's Proxy Statement --
"Executive Compensation" and is hereby incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the caption in Registrant's Proxy Statement -- "Voting
Securities and Principal Holders Thereof", "Election of Directors", and
"Information Concerning Executive Officers" which are hereby incorporated
by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14.(a)(1) Financial Statements
Financial statement for Frederick's of Hollywood, Inc. listed in
the Index to Financial Statements on page 11 are filed as part of this
annual report.
14.(a)(2) Financial Statement Schedules
None
14.(a)(3) Index to Exhibits
Exhibits are as set forth in the "Index to Exhibits" on page 28
of this annual report.
14.(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
August 31, 1996.
INDEX TO EXHIBITS
Exhibit No. Title
3(a) Certificate of Incorporation (incorporated by reference to
Exhibit 3(a) to Registration Statement on Form S-1, File No.
2-20034, filed on March 26, 1962)
3(b) Certificate of Amendment to Certificate of Incorporation
effective July 16, 1969 (incorporated by reference to
Exhibit 3(b) to Registration Statement on Form S-1, File No.
2-35116, filed on October 27, 1969)
3(c) Certificate of Amendment to Certificate of Incorporation
effective February 6, 1984 (incorporated by reference to
Exhibit 3(c) to Form 10-K for fiscal year ended September 2,
1984)
3(d) Certificate of Amendment to Certificate of Incorporation
effective December 24, 1986 (incorporated by reference to
Exhibit 3(d) to Form 10-K for fiscal year ended August 29,
1987)
3(e) Certificate of Amendment to Certificate of Incorporation
filed with the Delaware Secretary of State on February 5,
1992 (incorporated by reference to Exhibit 3(e) to Form
10-K for fiscal year ended August 29, 1992)
3(f) Bylaws, as amended (incorporated by reference to Exhibit
3(d) to Form 10-K for fiscal year ended August 31, 1986)
4 See Exhibits 3(a), 3(b), 3(c) and 3(d) for rights of capital
stock
9 Omitted (Inapplicable)
10(a) Copy of Profit Sharing Plan (incorporated by reference to
Exhibit 10(a) to Form 10-K for the fiscal year ended August
28, 1981)
10(b) Copy of the 1984 Stock Option Plan (incorporated by
reference to Exhibit No. 4.1 to Registration Statement on
Form S-8, File No. 2-97418, filed on April 18, 1985)
10(c) Copy of the 1990 Stock Option Plan (incorporated by
reference to exhibit No. 4.2 to Registration Statement on
Form S-8, File No. 1-8252. Filed on January 31, 1991)
10(d) Copy of the Amended Employment Agreement dated August 31,
1989 with George W. Townson (incorporated by reference to
Exhibits 10(e) to Form 10-K for the fiscal year ended
September 2, 1989)
10(e) Copy of the second amendment to the Amended Employment
Agreement with George W. Townson dated August 30, 1992
(incorporated by reference to Exhibit 10(e) to Form 10-K
for fiscal year ended August 29, 1992)
10(f) Copy of Lease Agreement with LAPCO Industrial Park dated May
11, 1989 (incorporated by reference to Exhibits 10(d) to
Form 10-K for fiscal year ended September 2, 1989)
10(g) Copy of Executive Savings Plan for key executives effective
June 1, 1989 (incorporated by reference to Exhibit 10(f) to
Form 10-K for fiscal year ended September 2, 1989)
10(h) Copy of Executive Retirement Plan for key executives
effective June 1, 1989 (incorporated by reference to Exhibit
10(g) to Form 10-K for fiscal year ended September 2, 1989)
10(i) Copy of Term Lease Master Agreement with IBM Credit
Corporation identified as Agreement No. 3541686
(incorporated by reference to Exhibit 10(i) to Form 10-K for
fiscal year ended August 31, 1991)
10(j) Copy of Frederick's of Hollywood, Inc. Employee Stock
Ownership Plan (incorporated by reference to Exhibit 10(k) to
Form 10-K for fiscal year ended August 28, 1993)
10(k) Copy of Frederick's of Hollywood, Inc. Employee Stock
Ownership Plan Trust Agreement (incorporated by reference to
Exhibit 10(l) to From 10-K for fiscal year ended August 28, 1993)
10(l) Copy of employment agreement dated April 19, 1996 with
John B. Hatfield
10(m) Copy of agreement dated May 14, 1996 with Janney Montgomery
Scott Inc. regarding increasing shareholder value
11 Omitted (Inapplicable)
12 Omitted (Inapplicable)
13 Omitted (Inapplicable)
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
22 List of subsidiaries of Frederick's of Hollywood, Inc.,
(incorporated by reference to Exhibit 22 to Form 10-K for
the fiscal year ended September 4, 1983)
23 Omitted (Inapplicable)
24 Consent of KPMG Peat Marwick LLP
25 Omitted (Inapplicable)
27 Financial Data Schedule
28 Omitted (Inapplicable)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) or the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on the
21st day of November 1996.
FREDERICK'S OF HOLLYWOOD, INC.
By: /s/George W. Townson
George W. Townson
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on November 21, 1996.
Signature Title
/s/George W. Townson) Chief Executive Officer and
George W. Townson Director (Principal
Executive Officer)
/s/John B. Hatfield) Executive Vice President -
John B. Hatfield Chief Financial and
Administrative Officer
(Principal Financial and
Accounting officer)
/s/Morton R. Field)
Morton R. Field Director
/s/William J. Barrett)
William J. Barrett Director
/s/Hugh V. Hunter
Hugh V. Hunter Director
/s/Merle A. Johnston
Merle A. Johnston Director
/s/Richard O. Starbird
Richard O. Starbird Director
/s/Sylvan Lefcoe
Sylvan Lefcoe Director
EMPLOYMENT AGREEMENT
JOHN B. HATFIELD ("Employee"), is presently employed by
FREDERICK'S OF HOLLYWOOD, INC., a Delaware corporation
("Company"), serving under an "at will" arrangement as Company's
Executive Vice President, Chief Financial Officer and
Administrative Officer, reporting to the Chairman of the Board,
President and Chief Executive Officer ("CEO"). In consideration
of Employee's continued employment, Company and Employee hereby
enter into this employment agreement ("Agreement") as follows:
1. Employee accepts continued "at will" employment by
Company upon the same terms and conditions as have existed prior
to the date of this Agreement, except as modified hereby.
Employee's present annual compensation is $173,500.00, and this
amount, or the amount fixed from time to time by the Compensation
Committee of the Board on the recommendation of CEO is the "Base
Compensation" for purposes of this Agreement.
2. If Employee is terminated for any reason during a
period of twelve months following the occurrence of an "Event" as
defined at Section 3, or voluntarily terminates his employment
(i) during the period commencing at the end of the sixth month
following an Event and ending at the expiration of the twelfth
month following an Event, or (ii) at any time following an Event
for "Good Reason" as defined in Section 4, Employee shall receive
a lump sum amount in addition to any compensation otherwise due
him, equal to one year's Base Compensation and, for one year
following termination, free participation in any employee
insurance, medical or dental plans ("Benefit Plan(s)") in which he
participated immediately prior to termination, or in a substitute
benefit plan or plans substantially equivalent to such Benefit
Plan(s).
3. The occurrence of any one or more of the following
shall constitute an "Event" for the purposes of this Agreement:
a. If any person (other than any person who as of the
date hereof is the beneficial owner of ten percent (10%) or more
of the Company"s voting securities), or group of persons acting
in concert becomes the beneficial owner of thirty percent (30%)
or more of the Company's outstanding voting securities or
securities convertible into such amount of voting securities; or
b. The shareholders of Company approve (i) a merger
or consolidation of the Company with any other corporation, (ii)
a plan of complete liquidation of Company, or (iii) an agreement
for the sale or disposition by Company of all or substantially
all of Company's assets. However, no merger or consolidation
shall be deemed an Event if the voting securities of Company
outstanding immediately prior to a merger or consolidation
continue to represent at least eighty percent (80%) of the
combined voting power of the voting securities of Company, or any
surviving entity, outstanding immediately thereafter.
4. Following an Event, unless corrected within fifteen
(15) days of written notice from Employee to Company, "Good
Reason" for Employee to voluntarily terminate employment means
any adverse alteration in the nature or status of Employee's
responsibilities from those in effect immediately preceding an
Event; any reduction by Company in the Employee's Base
Compensation; a relocation of Employee to an employment site more
than thirty (30) miles from his present employment location;
requiring Employee to travel on Company business to an extent
substantially inconsistent with Employee's business travel
obligations prior to an Event, or the failure by Company to
continue: (i) any Benefit Plan or any substitute plan adopted
following an Event, or (ii) Employee's participation therein on a
basis not materially less favorable both in terms of the amount
of benefits provided and the level of Employee's participation
relative to other participants.
5. This Agreement: (i) shall be construed under the law of
contracts of the State of California; (ii) merges in it all prior
representations and negotiations, and is the final, exclusive
statement of the terms and conditions of agreement; (iii) may not
be amended or contradicted except by a later writing signed by
the party to be charged: (iv) shall not be assignable without
written consent of all parties; (v) shall benefit and bind each
party's successor, of whatever legal description; (vi) may be
executed in counterparts, which nevertheless constitute one and
the same agreement, and (vii) is deemed the joint legal product
of all parties, no matter the draftsman's identity. Employee's
continued employment shall not constitute consent to, or a waiver
of rights hereunder, nor shall Employee be required to mitigate
the amount of any payment or benefit under this Agreement by
seeking other employment, or otherwise. Company has no right to
offset any Benefit Plan payment, Employee debt to Company, or
any subsequent earnings or benefits of Employee from any source
against any consideration due employee hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement
on April 19, 1996.
FREDERICK'S OF HOLLYWOOD, INC. EMPLOYEE:
By /s/ George Townson /s/ John B. Hatfield
GEORGE TOWNSON, its JOHN B. HATFIELD
Chairman or the Board,
President and Chief
Executive Officer
Janney Montgomery Scott Inc.
26 Broadway
New York, NY 10004
May 14, 1996
Board of Directors
Frederick's of Hollywood, Inc.
6608 Hollywood Boulevard
Hollywood, California 90028
Att: Mr. George Townson
Chairman of the Board
Ladies and Gentlemen:
This letter will confirm our understanding concerning the
financial advisory services and fairness opinion ("Fairness
Opinion") Janney Montgomery Scott Inc. ("JMS") will render to
Frederick's of Hollywood, Inc. ("FOH" or the "Company") in
connection with your program to enhance shareholder value. This
program may include the sale of any or all of FOH"s stock or
assets, or its merger, consolidation or other type of combination
("Transaction"); additionally, we understand your program may be
expanded to include other alternatives such as recapitalization,
joint ventures, foreign investment on a direct or indirect basis,
and the sale of securities by the controlling shareholders.
We intend to simultaneously solicit a similar engagement
agreement from the controlling shareholders to properly allocate
fees if only their shares are sold.
Due to our over ten-year association with the Company and
our presence on the Board, we believe JMS is uniquely qualified
for this shareholder value enhancement assignment due to our
knowledge of the Company, its trends and prospects.
JMS' understanding with respect to its engagement by the
Board of FOH is as follows:
A. With regard to financial advisory services:
1. JMS will work with the Company to develop an effective
shareholder enhancement program and strategy.
2. JMS shall have the exclusive opportunity to represent
FOH for nine months commencing at the date of this letter or
conclusion of the Transaction whichever comes first. After
approval of the Board, JMS will expeditiously move discussions
forward with certain identified qualified candidates for FOH as
approved by the Company in writing. JMS may use the services of
other investment bankers in this engagement whose fees and
expenses will be the responsibility of JMS. JMS may also market
the control block and if successful will be compensated by the
selling shareholders.
3. FOH management will assist JMS in the preparation of
any memorandum utilized in this effort, and will cooperate with
JMS and potential candidates in analyzing data presented,
management interviews, and facility visits.
4. Within a two-year period from the date hereof, should
any company, individual or other entity introduced by JMS or
involved in negotiation during the term of this agreement
("Buyer(s)") acquire any or all of the stock or assets of FOH, or
any subsidiary or affiliate thereof, as part of a corporate
acquisition transaction, or merge, consolidate or otherwise
combine with FOH, or should FOH or any of its subsidiaries or
affiliates purchase any or all of the stock or assets of, or
merge, consolidate or otherwise combine with any Buyer(s) as part
of a corporate acquisition transaction, JMS shall be paid a fee
by FOH at the closing ("Fee") of 5% of the first million of
"Transaction Value" received, 4% of the second million, 3% of the
third million, 2% of the fourth million and 1% or the transaction
value thereafter. Upon the termination of this engagement, JMS
will provide a list of all companies introduced to FOH by JMS.
5. As used herein the term Transaction Value, unless
otherwise mutually agreed upon by FOH and JMS, is defined as
follows:
a. In the case of a cash transaction, the total cash
consideration paid.
b. In the case of publicly traded common stock, the
total public market value of such common stock based on the
closing price on the day of the transaction.
c. In the case of debt securities, the total public
market value of such debt securities based on the closing price
on the day of the transaction; if not publicly traded, then at
face value.
d. In the case of preferred stock, the total
liquidation value or public market value of such preferred stock
based on the closing price on the day of the transaction,
whichever is higher.
e. Should the medium of exchange be any other
security of any combination of the above, the value will be
mutually agreed upon. Any dispute will be settled by an
independent investment banker acceptable to FOH and JMS.
f. If the purchase price is to be paid in one or more
installments, or in a contingent pay-out, the said JMS cash fee
shall be paid within thirty (30) days after each such installment
or contingent pay-out in the same proportion which the
installment or contingent pay-out bears to the total purchase
price.
6. Upon the Buyer and the Company entering into a
definitive purchase agreement, JMS shall be entitled to its fee
and such fee shall be paid at the closing date as defined in the
definitive purchase agreement. In the event the Company elects
to repudiate the definitive purchase agreement and such
repudiation is not based on any alleged breach of contract by the
Buyer, then JMS shall be entitled to its Fee to be paid within 30
days after the Company's act of repudiation. In the event the
Buyers and Seller mutually agree to rescind the definitive
purchase agreement, JMS shall not be entitled to a Fee but will
be entitled to 50% of any "Breakup Fee" after payment of all JMS,
Company and other expenses related to the Transaction.
If the Company received a Transaction topping bid and
accepts it, JMS shall be paid a full fee in accordance with
paragraph A-4 above based on the value of the topping bid.
B. With regard to the issuance of a Fairness Opinion if
requested by the Company.
1. JMS is being engaged to render its written opinion on
the fairness, from a financial point of view, to the Company and
its public shareholders of the consideration or exchange ratio to
be received by FOH.
2. FOH and the Buyer will provide such information as JMS
will request and will cooperate fully with JMS in JMS' engagement
hereunder.
3. In rendering its opinion, JMS will perform such
investment banking techniques and analyses as it deems
appropriate under the circumstances.
4. JMS' opinion will be financial in nature and will not
include any judgment with regard to products, markets,
management, etc.
5. The Company may publish JMS' opinion in its entirety in
any tender offering document, proxy statement or other documents
distributed to its stockholders in connection with a Transaction,
but the proposed utilization of a summary of JMS opinion or of
its engagement hereunder in any written document, including any
proxy statement or offering statement, shall require the prior
written consent of JMS concerning specific language to be
employed for which no additional compensation or expenses shall
be paid or reimbursed and which consent shall not be unreasonably
withheld.
6. JMS shall be paid $100,000 in cash upon the rendering
of its opinion to the Board of Director of FOH ("Fairness Opinion
Fee'). Fifty percent (50%) of the Fairness Opinion Fee shall be
credited against all other fees owed related to JMS' engagement
hereunder.
FOH will reimburse JMS on a monthly basis for its
accountable travel and other out-of-pocket expenses, including
any pre-approved consulting or legal expenses. FOH's maximum
obligation for travel and out-of-pocket expenses would be
$10,000. In addition, JMS will receive a non-refundable $30,000
time, due diligence and offering memorandum preparation payment
upon the signing hereof, which will be credited 100% against any
fee owed.
The Company recognizes and confirms that, in performing its
engagement, JMS will be using and relying on data, material and
other information furnished to it by the Company, or its auditing
firm, attorneys, or others (collectively "Advisors") as well as
information otherwise available, both oral and written (such
data, material and other information is hereinafter referred to
as the "Information"). The Company recognizes and confirms that
JMS does not assume responsibility for the accuracy or
completeness of the Information. The Company hereby represents
and warrants that any of the Information furnished by it or its
advisors to JMS will be complete in all respects and not contain
any untrue statement of a material fact or omit to state any
material fact necessary to make the statement therein not false
or misleading.
JMS recognizes and confirms that some of the Information is
either non-public, confidential or proprietary in nature. JMS
hereby agrees that the Information will be kept confidential and
will not, without the prior consent of the Company, be disclosed
by them, their agents or employees, other than in connection with
the services to the Company as described above or as otherwise
required by law.
The Company agrees to indemnify and hold harmless JMS, its
employees and representatives and each person, if any, who
controls JMS within the meaning of the Securities Exchange Act of
1934 (the "Act") from and against any and all losses, claims,
damages or liabilities, joint or several, including all
reasonable out-of-pocket expenses, fees and disbursements of
counsel incurred by JMS, its employees, representatives or such
controlling person in defending any claim, action or proceeding
whether or not resulting in liability to JMS, its employees,
representatives or any such controlling person, to which they may
become subject, caused by, arising out of or in connection with
our engagement including but not limited to losses, claims,
damages or liabilities caused by or arising out of any untrue
statement of a material fact contained in information furnished
to JMS by the Company or its Advisors in connection with our
engagement, or any omission to state therein any material fact
required or necessary to make the information not misleading in
light of circumstances under which given, or any other violation
of the federal securities laws or the securities laws of any
state, or otherwise arising out of our engagement hereunder
except in respect of any matter as to which JMS shall have been
adjudicated to have acted with gross negligence or willful
malfeasance. In the event testimony from, or appearance by, any
employee or consultant of JMS is required before any tribunal or
other body or agency in connection with JMS' engagement
hereunder, the Company agrees to promptly reimburse JMS for
accountable expenses (including legal expenses of JMS) as well as
compensation at the rate of $2,000 per person per day for all
time expended in preparing for and appearing and/or testifying,
notwithstanding that any such appearance and/or testimony shall
be required by court or other process. Upon request of JMS, the
Company will pay a reasonable retainer to JMS' counsel required
in connection with the preceding sentence.
To the extent of the fees provided for hereunder paid to
JMS, JMS will indemnify and hold FOH harmless from claims by
corporations, firms or persons claiming by virtue of a
relationship with JMS to be entitled to a share of the fees
provided hereunder. Each party shall indemnify and hold the
other party harmless from and against any claim, liability, loss
or damages (including reasonable counsel fees) resulting from the
breach by such indemnifying party of any term, condition or
provision of this agreement.
If the foregoing correctly states our mutual understanding,
please sign the enclosed copy of this letter and return it along
with a check in the amount of $30,000 to the undersigned. It
should be noted that no additional fees would be due JMS until a
transaction was completed.
Sincerely yours,
JANNEY MONTGOMERY SCOTT INC.
By: /s/ Herbert M. Gardner
Herbert M. Gardner
Senior Vice President
HMG:bb
Accepted and Agreed to:
FREDERICK'S OF HOLLYWOOD, INC.
By: /s/ George Townson
George W. Townson
Chairman of the Board
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KPMG Peat Marwick LLP
725 South Figueroa Street
Los Angeles, CA 90017
The Directors and Stockholders
Frederick's of Hollywood, Inc.:
We consent to incorporation by reference in the Registration
Statements (nos. 33-73188, 33-89718) on Forms S-8 and S-3 of
Frederick's of Hollywood, Inc., of our report dated October 25,
1996, relating to the consolidated balance sheets of Frederick's
of Hollywood, Inc. and subsidiaries as of September 2, 1995 and
September 3, 1994 and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each
of the years in the three-year period ended September 2, 1995,
which report appears in the September 2, 1995 annual report on
Form 10-K of Frederick's of Hollywood, Inc.
/s/ KPMG Peat Marwick LLP
October 25, 1996
